118 T.C. No. 34
UNITED STATES TAX COURT
RODNEY J. BLONIEN AND NOREEN E. BLONIEN, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 2660-00. Filed June 12, 2002.
R issued an “affected items” notice of deficiency to P for 1992, attributable to P’s distributive share of cancellation of debt income of an insolvent law partnership. R claims that the period for assessment of partnership items under sec. 6229, I.R.C., has not expired by reason of the extension of the period of limitations by the partnership’s tax matters partner. P claims the separate period of limitations relating to partnership items in sec. 6229, I.R.C., does not apply to him because he never became a partner in the partnership, and that the period of limitations for assessing nonpartnership items under sec. 6501, I.R.C., has expired. R claims we lack jurisdiction to consider P’s argument that he was not a partner, and that assessment of the deficiency is therefore timely under sec. 6229, I.R.C. Held: We have no jurisdiction to consider P’s argument that he was not a partner. Whether P was a partner is a partnership item that can be challenged only at the partnership level. P has no standing to challenge on due process grounds the partnership-level - 2 -
determination that he was a partner because (1) P claimed on prior returns that he was a partner, and (2) P received a Schedule K-1 from the partnership for the year in issue and failed to file with his return a Form 8082, Notice of Inconsistent Treatment or Administrative Adjustment Request, notifying respondent of his position that he was not a partner. Therefore, the applicable period of limitations under sec. 6229, I.R.C., for R to assess the deficiency has not expired. Held, further, we have jurisdiction to consider partner-level adjustments in a Rule 155 computation.
R. Todd Luoma, for petitioners.
Kathryn K. Vetter, for respondent.
BEGHE, Judge: On December 17, 1999, respondent issued
petitioners an “affected items” notice of deficiency of $11,826
in their 1992 Federal income tax. The deficiency is attributable
to inclusion in the income of petitioner Rodney J. Blonien (Mr.
Blonien) of his distributive share of cancellation of debt (COD)
income of Finley, Kumble, Wagner, Heine, Underberg, Manley,
Myerson & Casey (Finley Kumble), a law partnership that had
become insolvent.
Petitioners allege assessment is barred by the 3-year period
of limitations provided in section 6501(a)1 because Mr. Blonien
was not a partner of Finley Kumble subject to the alternative
period of limitations provided by section 6229 for the assessment
1 Unless otherwise indicated, all section references are to the Internal Revenue Code in effect for the year at issue, and all Rule references are to the Tax Court Rules of Practice and Procedure. - 3 -
of partnership and affected items. Respondent argues that we
lack jurisdiction to question Finley Kumble’s decision to treat
Mr. Blonien as a partner, and that Mr. Blonien was a partner.
We hold that we have no jurisdiction in this proceeding to
consider Mr. Blonien’s argument that he was not a partner in
Finley Kumble. To the extent the determination would affect the
allocation of partnership items among the other partners, the
determination of who is a partner is a partnership item that must
be challenged at the partnership level. Therefore, assessment of
the deficiency against petitioners for 1992 arising out of Mr.
Blonien’s share of Finley Kumble’s items is not barred by the
applicable statute of limitations.
We have jurisdiction in this deficiency proceeding to
adjudicate the effect of Mr. Blonien’s share of partnership items
(determined at the partnership level) on petitioners’ tax
liability. The deficiency will be determined in accordance with
Rule 155.
FINDINGS OF FACT
The parties have stipulated some of the facts. The
stipulation of facts and the attached exhibits are incorporated
herein by this reference. Petitioners lived in Elk Grove,
California, when they filed their petition in this case.
Mr. Blonien is an attorney who has been admitted to practice
law in California since 1972. - 4 -
Before the years in issue, Mr. Blonien worked as an attorney
for the State of California. He began his legal career in 1972
as an attorney for the California attorney general’s office and
continued in that position until he was appointed legal affairs
secretary to then Governor Ronald Reagan. After working for the
Governor, Mr. Blonien became executive director of the California
Peace Officer’s Association. He then returned to the California
attorney general’s office as a senior assistant attorney general
and thereafter was appointed special assistant attorney general.
In 1982, he was appointed legislative secretary and policy
director to Governor George Deukmejian. In December 1984, he
moved from the Governor’s office to be undersecretary of the
Youth and Adult Corrections Agency of California.
In November 1986, then California Treasurer Jess Unruh
arranged for Mr. Blonien to meet former New York Governor Hugh L.
Carey, then a senior partner in Finley Kumble. Governor Carey
introduced Mr. Blonien to other senior partners of Finley Kumble,
including Steven Kumble and Harvey Myerson. After the meeting,
Governor Carey informed Mr. Blonien that Messrs. Kumble and
Myerson intended to recommend to Finley Kumble that Mr. Blonien
be offered the opportunity to join Finley Kumble as a partner.
In December 1986, Mr. Blonien asked Governor Carey about
the status of a Finley Kumble offer. Governor Carey informed Mr.
Blonien that the offer was “on”, and that Mr. Blonien should - 5 -
start a modest branch office of Finley Kumble in Sacramento,
California. Mr. Blonien continued to have conversations with
Governor Carey about opening a Finley Kumble branch office in
Sacramento.
In March 1987, Mr. Blonien reached an oral agreement to join
Finley Kumble as a partner. Under the terms of the agreement,
Mr. Blonien was to receive a draw of $8,750 per month and was to
make a capital contribution to Finley Kumble of $80,000. Finley
Kumble agreed to arrange for Mr. Blonien to borrow the funds to
make the capital contribution from its lender, Manufacturers
Hanover Bank.2
On April 1, 1987, Mr. Blonien left the California State
government to begin practicing law with Finley Kumble in
Sacramento. Acting on behalf of Finley Kumble, Mr. Blonien
sublet office space from another law firm, obtained office
2 The terms of the offer are set forth in a letter to Mr. Blonien dated Mar. 4, 1987, from Steven Kumble, Harvey Myerson, Robert Washington, and Governor Carey. Mr. Blonien testified that he did not receive this letter until after Sept. 2, 1987. Mr. Blonien testified that Governor Carey orally informed him of these same basic terms in March 1987, but that he did not receive written confirmation of the terms until September 1987. Respondent argues that Mr. Blonien’s testimony is self-serving, and that it is incredible that Mr. Blonien would leave his government job without written confirmation of Finley Kumble’s offer. It does not matter in the case at hand whether the offer and acceptance were oral or written, and we therefore need not decide when Mr. Blonien first received written confirmation of the terms of the partnership offer. Mr. Blonien testified that he assumed, when he started working for Finley Kumble, that his relationship with the firm would be as described in the letter dated Mar. 4, 1987. - 6 -
furniture and equipment from a friend who had closed a real
estate office, hired office employees, obtained a telephone
number, and opened the Sacramento office for Finley Kumble. On
the day he opened the Finley Kumble Sacramento office, California
treasurer Jess Unruh called Mr. Blonien to inform him that Finley
Kumble would be appointed counsel for the issuer or underwriter
in several new California agency bond transactions. Finley
Kumble began to pay the payroll for its Sacramento office by the
third week of April, reimbursed Mr. Blonien for office expenses
advanced by him, and paid him a draw of approximately $4,000
every 2 weeks. See infra note 3. A month or so after the
opening of the Sacramento office, Finley Kumble sent out a notice
that Mr. Blonien had joined the firm as a partner and that the
Sacramento office was open. Mr. Blonien’s title was partner, and
he expected that he would be a partner of Finley Kumble in all
respects once the paperwork was finalized.
During summer 1987, Mr. Blonien read an article in “The
American Lawyer” concerning Finley Kumble’s financial problems.
These problems arose from Finley Kumble’s practice of factoring
its accounts receivable and its failures, upon collecting the
accounts, to repay the factor’s advances. A number of partners
of Finley Kumble left the firm around this time, and Mr. Blonien
questioned whether he should remain with the firm. - 7 -
On September 2, 1987, Finley Kumble sent Mr. Blonien a copy
of the partnership agreement to sign along with loan documents to
execute to borrow the funds necessary to make his capital
contribution. Because of his concerns about Finley Kumble’s
financial viability, Mr. Blonien did not sign the partnership
agreement. During October 1987, Finley Kumble pressured Mr.
Blonien to sign the partnership agreement and make his capital
contribution. In November 1987, Mr. Blonien met with Governor
Carey, Steven Kumble, and Jim Normile to discuss his concerns
about Finley Kumble’s viability. Mr. Blonien still did not feel
reassured about Finley Kumble’s viability, and he did not sign
the partnership agreement or the loan documents.
In late November and early December, several of Mr.
Blonien’s bond clients informed him that they would be seeking
other counsel because Finley Kumble’s well-publicized financial
problems called into question the value of the legal opinions
Finley Kumble would be required to issue in connection with the
bond transactions that Mr. Blonien had originated. Despite these
problems, which led to the loss of some clients and writedowns of
billable time, Finley Kumble did collect fees for its legal
services in bond transactions that Mr. Blonien had originated.
On December 8, 1987, after Finley Kumble announced its
dissolution, Mr. Blonien sent a letter to Finley Kumble in which
he stated that he was withdrawing as a partner of the - 8 -
partnership: “It is with a great deal of reluctance that I, this
date, tender my resignation as a partner in the firm of Finley
Kumble”. Mr. Blonien subsequently joined the law firm of Whitman
& Ransom, along with former Finley Kumble partners Governor Carey
and Jim Normile and other members of the public finance
department of Finley Kumble.
Mr. Blonien received more than $64,000 in draws from Finley
Kumble in 1987.3 Petitioners did not report receiving wages from
Finley Kumble on their Form 1040, U.S. Individual Income Tax
Return, for 1987. Instead, petitioners reported Mr. Blonien’s
distributive share of partnership income from Finley Kumble on
Schedule E, Supplemental Income and Loss, in the amount of only
$15,310. Petitioners did not file with their 1987 return Form
8082, Notice of Inconsistent Treatment or Administrative
Adjustment Request, with respect to Finley Kumble, or otherwise
3 Mr. Blonien testified that he received draws of approximately $8,000 per month. The formal offer letter dated Mar. 4, 1987, which Mr. Blonien claims he did not receive until months later, indicates draws of $8,750 per month beginning Apr. 1, 1987. Mr. Blonien testified that the offer letter set forth the terms of his agreement with Finley Kumble. Yet he also testified that he thought his compensation was only about $8,000 per month. The parties did not offer conclusive evidence of the exact amount Mr. Blonien received from Finley Kumble in 1987. Presumably, Mr. Blonien received these draws from April through at least November 1987 (8 months). The terms of the offer letter suggest that Mr. Blonien likely received at least $70,000 in distributions from Finley Kumble during 1987. In any event, Mr. Blonien received substantially more money from Finley Kumble in 1987 than petitioners reported as income on their Federal income tax returns. - 9 -
notify the Internal Revenue Service that they were claiming that
Mr. Blonien was not a partner in Finley Kumble.
On February 24, 1988, several of Finley Kumble’s creditor
banks filed an involuntary petition under chapter 7 of the
Bankruptcy Code against Finley Kumble. On March 4, 1988, the
bankruptcy court granted relief to Finley Kumble under chapter 11
of the Bankruptcy Code. In 1992, a substantial amount of Finley
Kumble’s debts was discharged in the bankruptcy proceeding.
On Schedule E attached to their 1988 Federal income tax
return, petitioners reported a nonpassive partnership loss of
$106 from Finley Kumble and substantial partnership income from
the Whitman & Ransom law firm. Mr. Blonien believes that
petitioners reported this loss on the basis of a Schedule K-1,
Partner’s Share of Income, Credits, Deductions, Etc., he received
from Finley Kumble. Petitioners did not file Form 8082 with
respect to Finley Kumble with their 1988 return or otherwise
notify the Internal Revenue Service that they were claiming that
On May 23, 1991, Mr. Blonien entered into a settlement
agreement with Francis Musselman, the chapter 11 trustee for
Finley Kumble. Under the settlement agreement, Mr. Blonien
agreed to pay $15,000 over a period of 10 years, together with
interest at the rate of 10 percent per year, to the Finley Kumble
bankruptcy estate. The settlement agreement referred to and - 10 -
defined Mr. Blonien as the “partner”. Mr. Blonien entered into
the settlement agreement because the settlement amount was less
than the legal cost he would have incurred in defending against
the trustee’s claim.
On September 21, 1993, Finley Kumble filed its 1992 Form
1065, U.S. Partnership Return of Income. On this return, which
was signed on behalf of Finley Kumble by Mr. Musselman as
trustee, the firm reported that it had 280 partners, including
Mr. Blonien. On the face of the return at line 7, Other income
(loss), Finley Kumble referenced “SEE STATEMENT 1", which was a
Form 8275, Disclosure Statement, containing an Item 2
“CANCELLATION OF INDEBTEDNESS $55,777,452"; Statement 2 to the
return indicated that this amount had been included in “OTHER
INCOME INCLUDED IN SCHEDULE M-1, LINE 9: INCOME FROM
CANCELLATION OF DEBT.” The last paragraph of the attachment to
the Disclosure Statement states as follows:
On December 9, 1991, the Bankruptcy Court entered an order confirming the Chapter 11 plan proposed by the Trustee, with certain amendments (“Plan”). This order became final and non-appealable in February, 1992 and the Plan became effective on March 19, 1992 (“Effective Date”). In the Closing Agreement being negotiated with the Internal Revenue Service (“IRS”), it is expected that the Trustee will stipulate the amount of cancellation of indebtedness income (“COD”) to be $55,777,452. This COD has been calculated using various estimates and methods as requested by the IRS. The COD has been determined using the assets of the Partnership at the beginning of 1992, the expected contributions of all the Finley partners, and the estimate of the allowed claims in their appropriate - 11 -
classification at the Effective Date. The COD has been allocated to the partners based upon a formula developed with the IRS. If no Closing Agreement is entered into, the Trustee may amend the return to reflect an alternative position with respect to the timing of recognition of COD income.
Mr. Blonien received a Schedule K-1 from Finley Kumble for
1992, indicating that his distributive shares of Finley Kumble
items were as follows:
Distributive Partnership Item Share
Ordinary income (loss) ($1,252) Interest 127 Net long-term capital gain (loss) (8) Sec. 1231 gain (loss) (10) Income from cancellation of debt 37,212
The Schedule K-1 indicated that Mr. Blonien had a 0.0170-percent
interest in Finley Kumble’s profits and losses, and a 0.0345-
percent interest in Finley Kumble’s capital. The Schedule K-1
also indicated that Mr. Blonien had a yearend negative capital
account of $13,717.
On October 15, 1993, pursuant to extensions, petitioners
filed their 1992 Federal income tax return, which respondent
received on October 20, 1993.
Petitioners reported $2,000 of COD income from Finley Kumble
on line 22, page 1 of their 1992 return as follows: “Other
Income. COD INCOME FINLEY, KUMBLE ET AL 2,000”. Other than this
$2,000 reported on the face of the return, petitioners did not
account therein for Mr. Blonien’s distributive share of items
from Finley Kumble or his negative capital account or include any - 12 -
reference to Finley Kumble on Schedule E of the 1992 return.
Petitioners did not file Form 8082 with respect to Finley Kumble
with their 1992 return or otherwise notify the Internal Revenue
Service that they were claiming that Mr. Blonien was not a
partner in Finley Kumble.
Petitioners’ 1992 return was prepared by their accountant,
Andrew Lundholm. Mr. Blonien did not know why he reported $2,000
of COD income of Finley Kumble, rather than the amount shown on
the Schedule K-1 from Finley Kumble.
Petitioners did report on Schedule E of their 1992 return
Mr. Blonien’s share of partnership income from Whitman & Ransom.
Petitioners did include with their 1992 return Form 8082 with
respect to Whitman & Ransom. Petitioners indicated thereon that
the amount shown on “Line 5 Guaranteed Payments to Partner” and
“Line 15a Net Earnings (loss) from self-employment” of the
Schedule K-1 received from Whitman & Ransom exceeded the amount
being reported by them on Schedule E, with the following
explanation: “Line 10 & 11 - Partnership reported items on an
accrual basis although it is a cash tax reporter Amount reported
on this return are [sic] amounts actually received.”
Petitioners’ accountant, Mr. Lundholm, sent a letter to
respondent dated July 21, 1995, requesting respondent to abate
late-filing penalties assessed for 1990, 1991, and 1992. In the
letter, Mr. Lundholm stated: - 13 -
The extensions were necessary as all the data needed to file a complete and accurate return was not available at the time of the original due dates. In particular a New York based law partnership, (Finley, Kumble and Wagner--XX-XXXXXXX) in which Mr. Blonien was a partner. This particular partnership filed for bankruptcy in 1988 and has been in audit by the Internal Revenue Service for years. Mr. Blonien has been involved with the various lawsuits and audits from 1988 to the present, (last correspondence from the service regarding this partnership is dated December 22, 1994). This partnership alone made it impossible to file his returns without additional time allowed by the extensions. [Emphasis added.]
On May 10, 1996, respondent appointed Marshall Manley to be
the tax matters partner (TMP) for Finley Kumble because he was
the Finley Kumble partner with the largest partnership share. On
June 20, 1996, Marshall Manley, as TMP of Finley Kumble, signed a
Form 872-P, Consent to Extend the Time to Assess Tax Attributable
to Items of a Partnership, by which the period to assess the
Finley Kumble partners for partnership items for the calendar
year 1992 was extended to December 31, 1997. On May 29, 1997,
Mr. Manley, as TMP of Finley Kumble, signed a second Form 872-P,
extending the assessment period to December 31, 1998.
Petitioners were aware that respondent was examining Finley
Kumble’s partnership returns.
On August 10, 1998, respondent issued a notice of final
partnership administrative adjustment (FPAA) for Finley Kumble to
Marshall Manley, TMP, for the calendar year 1992. No petition
was timely filed with respect to the FPAA. - 14 -
On December 17, 1999, respondent sent petitioners an
affected items notice of deficiency, determining a deficiency of
$11,826 for the year ended 1992; the basis for the deficiency was
Mr. Blonien’s distributive share of Finley Kumble’s COD income in
the amount of $36,3324 and a phaseout of itemized deductions
under section 68 of $1,817 resulting from the additional Finley
Kumble income.5 This amount of COD income is $880 less than Mr.
Blonien’s distributive share of Finley Kumble’s COD income shown
on the Schedule K-1 that Mr. Blonien received from Finley Kumble.
It appears that, in issuing the notice, respondent did not give
petitioners credit for the $2,000 of Finley Kumble COD income
reported on page 1 of their 1992 return. It does not appear that
respondent made adjustments to petitioners’ tax liability for the
other items reported to Mr. Blonien on the Finley Kumble Schedule
K-1 and in the FPAA.
4 Presumably, respondent used the “affected items” procedure to enable Mr. Blonien and other Finley Kumble partners to claim that they need not recognize their respective shares of Finley Kumble’s COD income, to the extent of their own insolvency. Sec. 108(a)(1)(B), (d)(6); see Overstreet v. Commissioner, T.C. Memo. 2001-13, affd. in part and dismissed in part 33 Fed. Appx. 349 (9th Cir. 2002). Petitioners did not claim in their petition that they were insolvent. 5 In issuing the notice, respondent did not respond to the invitation in sec. 6222(d) to determine an accuracy-related penalty against petitioners under sec. 6662(a) for taking a position on their individual return inconsistent with the position taken by Finley Kumble on its partnership return without filing Form 8082 or otherwise explaining the basis for the inconsistency. - 15 -
OPINION
We Lack Jurisdiction To Consider Petitioners’ Argument That Mr. Blonien Was Not a Partner
Petitioners argue that Mr. Blonien never became a partner in
Finley Kumble. They therefore contend that the period of
limitations under section 6229 for respondent to assess a
deficiency relating to partnership items does not apply to them.
Petitioners further contend that the period of limitations for
assessing a deficiency relating to nonpartnership items (section
6501) has expired.
Respondent argues that we lack jurisdiction in this
proceeding to consider petitioners’ argument that Mr. Blonien was
not a partner in Finley Kumble. We agree with respondent.
“When a jurisdictional issue is raised, as well as a statute
of limitations issue, we must first decide whether we have
jurisdiction in the case before considering the statute of
limitations defense.” Saso v. Commissioner, 93 T.C. 730, 734-735
(1989) (citing King v. Commissioner, 88 T.C. 1042, 1050 (1987),
affd. on other grounds 857 F.2d 676 (9th Cir. 1988)).
Our jurisdiction cannot depend on the merits of petitioners’
allegations. Jurisdiction represents the power to hear a claim
and decide its merits. As the Supreme Court recently stated:
“Without jurisdiction the court cannot proceed at all in any
cause. Jurisdiction is power to declare the law, and when it
ceases to exist, the only function remaining to the court is that - 16 -
of announcing the fact and dismissing the cause.” Steel Co. v.
Citizens for a Better Envt., 523 U.S. 83, 94 (1998). We cannot
avoid the jurisdictional issue by assuming hypothetical
jurisdiction and disposing of the case on the merits. Id.
In support of his jurisdictional argument, respondent points
out that section 6221 requires “partnership items” to be
determined at the partnership level. Under section 6231(a)(3),
“partnership items” are those items that, by regulation, are more
appropriately determined at the partnership level than at the
partner level. The regulations contain a nonexclusive list of
items more appropriately determined at the partnership level.
Sec. 301.6231(a)(3)-1(a)(1), Proced. & Admin. Regs. The list
includes the amount of, and each partner’s distributive share of,
partnership items of income, gain, loss, deduction, or credit,
id., and any contributions, distributions, or transactions
subject to section 707(a) that are necessary to determine the
amount, character, or percentage interest of a partner in the
partnership, sec. 301.6231(a)(3)-1(a)(4), Proced. & Admin. Regs.
In order to determine each partner’s distributive share of
partnership items, it is necessary to know who are the partners
and what share of partnership items each partner is entitled to
and required to take into account. Therefore, to the extent that
the taxpayer’s claim that he was not a partner would affect the
distributive shares of the other partners, the taxpayer’s claim - 17 -
is a partnership item.6 We have no jurisdiction to consider
partnership items in a partner-level deficiency proceeding. GAF
Corp. v. Commissioner, 114 T.C. 519 (2000); Maxwell v.
Commissioner, 87 T.C. 783 (1986). Therefore, we are bound by the
determination made at the partnership level that Mr. Blonien was
a partner in Finley Kumble.
Petitioners Have Not Been Deprived of Due Process
Petitioners argue that treating their allegation that Mr.
Blonien was not a partner as a “partnership item”, over which we
have no jurisdiction in this partner-level deficiency proceeding,
6 We recognize that the determination of who is a partner can be a partner-level item where resolution of the issue would not affect the allocation of partnership items to the other partners. In Katz v. Commissioner, 116 T.C. 5 (2001), we held that allocation of a partnership distributive share between a partner and the partner’s bankruptcy estate was properly a partner-level item because the outcome of the dispute did not affect the allocation of partnership items among the other partners. Similarly, in Hang v. Commissioner, 95 T.C. 74 (1990), we held that the determination whether a father was equitable owner of S corporation shares held in the name of his sons is properly made at the individual shareholder level rather than at the corporate level in a TEFRA proceeding because the determination would not affect the distributive shares of the other shareholders.
In the case at hand, if petitioners were successful in arguing that Mr. Blonien was not a partner in Finley Kumble, then the share of Finley Kumble’s COD income wrongly allocated to Mr. Blonien would have to be reallocated among the other partners. Because the Finley Kumble partnership-level proceeding is completed, there may be no way to make the reallocations. Therefore, unlike the situation in Hang and Katz where resolution of the dispute would not affect the original partnership allocations, resolution of the dispute could affect the partnership allocations to the other partners. Therefore, the determination of whether Mr. Blonien was a partner in Finley Kumble is more appropriately determined at the partnership level. - 18 -
would deprive Mr. Blonien of due process and violate their
constitutional rights. Mr. Blonien observes that he had an
inherent conflict of interest with the Finley Kumble trustee and
Mr. Manley, the TMP, on this question. The trustee had an
interest in enlarging the group of persons against whom claims
for contribution to satisfy the claims of creditors could be
pursued. Mr. Manley, as the partner with the largest percentage
interest in the firm, had an interest in enlarging the group of
persons to whom the COD income would be allocated in order to
reduce his own share of the COD income. Yet, as Mr. Blonien
observes, he had no right to participate in the partnership-level
proceeding to dispute his partner status.7
Under the partnership unified audit and litigation
procedures enacted by the Tax Equity and Fiscal Responsibility
Act of 1982 (TEFRA), Pub. L. 97-248, sec. 402(a), 96 Stat. 648,
codified at sections 6221 through 6233, if a partnership has more
than 100 partners and a putative partner has less than a 1-
percent interest in the profits of the partnership, the
Commissioner generally need not give notice of a partnership
audit or proceeding to the putative partner, and the putative
partner has no standing to challenge the FPAA. Secs. 6223(b),
7 If a readjustment petition had been filed in the Tax Court by the TMP, a notice partner, or a 5-percent group, see infra note 8, there might have been an interesting question whether Mr. Blonien should be entitled under sec. 6226(c) to participate in the proceeding to present his claim that he was not a partner. - 19 -
6226(b); Energy Res., Ltd. v. Commissioner, 91 T.C. 913 (1988).8
These TEFRA provisions normally satisfy the requirements of due
process because the tax matters partner, who receives notice and
has the right to petition the Tax Court to reconsider the FPAA,
acts as the agent for the other partners. Kaplan v. United
States, 133 F.3d 469, 475 (7th Cir. 1998); Walthall v. United
States, 131 F.3d 1289, 1295 (9th Cir. 1997). However,
petitioners contend that this agency rationale does not apply to
persons who were not partners in the partnership and did not
otherwise agree to be bound by partnership-level determinations.
Nor, petitioners contend, citing Transpac Drilling Venture 1982-
12 v. Commissioner, 147 F.3d 221, 225 (2d Cir. 1998), revg. and
remanding T.C. Memo. 1994-26, does it apply to situations in
which the TMP has an inherent conflict of interest with the
putative partner on the question at issue, inasmuch as the agency
rationale is based on the notion that partners owe fiduciary
duties (including the duty of loyalty) to each other. See
Meinhard v. Salmon, 164 N.E. 545 (N.Y. 1928).
Whatever the merits of petitioners’ due process challenge,
there are two reasons they have no standing to raise it in this
8 It does not appear that partners with less than 1-percent interests in Finley Kumble banded together to constitute themselves a 5-percent group entitled, under sec. 6223(b)(2), to notice of and participation in the administrative proceeding at the partnership level and, under sec. 6226(b)(1), to file a petition to the Tax Court in response to the FPAA. - 20 -
proceeding. First, petitioners are estopped by the duty of
consistency from claiming that Mr. Blonien was not a partner in
Finley Kumble for Federal income tax purposes. Because of Finley
Kumble’s poor financial performance, petitioners reported as
income on their 1987 Federal income tax return far less than the
amount of money Mr. Blonien actually received from Finley Kumble.
Kumble in 1987. See supra note 3. Petitioners reported Mr.
Blonien’s distributive share of Finley Kumble’s partnership
income on Schedule E as only $15,310. In addition, petitioners
reported and claimed a partnership loss from Finley Kumble of
$106 for the year 1988, a year for which he also reported
substantial partnership income from Whitman & Ransom.
After receiving tax benefits by taking the position on their
Federal income tax returns that Mr. Blonien was a partner in
Finley Kumble in prior years, petitioners attempt to avoid
recognizing Mr. Blonien’s share of Finley Kumble’s COD income by
contending for 1992 that Mr. Blonien was merely an employee of
Finley Kumble. Petitioners want the benefits of Mr. Blonien’s
being a partner in earlier years without subjecting themselves to
the burdens of his being a partner in the later year at issue.
As Justice Brandeis stated in his seminal concurring opinion in
Ashwander v. TVA, 297 U.S. 288, 348 (1936): “The Court will not
pass upon the constitutionality of a statute at the instance of - 21 -
one who has availed himself of its benefits.” Accord Arnett v.
Kennedy, 416 U.S. 134, 153 (1974) (“It is an elementary rule of
constitutional law that one may not ‘retain the benefits of an
Act while attacking the constitutionality of one of its important
conditions’.” (quoting United States v. San Francisco, 310 U.S.
16, 29 (1940))).
The duty of consistency prevents petitioners from claiming
on their income tax returns that Mr. Blonien was a partner and
then asserting, following the TEFRA partnership proceeding, that
the statute of limitations bars assessment of the deficiency
because Mr. Blonien never became a partner after all. As we
explained in Hollen v. Commissioner, T.C. Memo. 2000-99, affd. 25
Fed. Appx. 484 (8th Cir. 2002):
The “duty of consistency”, sometimes referred to as quasi-estoppel, is an equitable doctrine that Federal courts historically have applied in appropriate cases to prevent unfair tax gamesmanship. The duty of consistency doctrine “is based on the theory that the taxpayer owes the Commissioner the duty to be consistent in the tax treatment of items and will not be permitted to benefit from the taxpayer’s own prior error or omission.” It prevents a taxpayer from taking one position on one tax return and a contrary position on a subsequent return after the limitations period has run for the earlier year. If the duty of consistency applies, a taxpayer who is gaining Federal tax benefits on the basis of a representation is estopped from taking a contrary return position in order to avoid taxes. [Citations omitted.]
If Mr. Blonien was not a partner in Finley Kumble, then
petitioners misrepresented the facts to respondent in their
earlier Federal income tax returns. Respondent relied on the - 22 -
misrepresentation in pursuing the partnership-level proceeding
and forgoing an individual proceeding against Mr. Blonien within
the period of limitations on assessment under section 6501(a).
Petitioners first notified respondent of their position that Mr.
Blonien was not a partner after the period of limitations had
expired for the assessment of a deficiency on the full amount of
wage income that would have been taxable to petitioners if Mr.
Blonien had been an employee of Finley Kumble rather than a
partner. These are the elements for equitable estoppel under the
duty of consistency.9 Under the duty of consistency, petitioners
are bound by the facts asserted in their returns--that Mr.
Blonien was a partner in Finley Kumble for Federal income tax
purposes.
Second, petitioners have no standing to raise a due process
challenge because they received a partnership Schedule K-1 from
Finley Kumble for 1992 and failed to file a Form 8082 or
otherwise notify respondent that they were taking a position
9 We have previously adopted the elements for the duty of consistency from the decision in Beltzer v. United States, 495 F.2d 211, 212 (8th Cir. 1974): “(1) the taxpayer has made a representation or reported an item for tax purposes in one year, (2) the Commissioner has acquiesced in or relied on that fact for that year, and (3) the taxpayer desires to change the representation, previously made, in a later year after the statute of limitations on assessments bars adjustments for the initial tax year.” See, e.g., Estate of Letts v. Commissioner, 109 T.C. 290, 297 (1997), affd. without published opinion 212 F.3d 600 (11th Cir. 2000); Hollen v. Commissioner, T.C. Memo. 2000-99, affd. 25 Fed. Appx. 484 (8th Cir. 2002). - 23 -
(that Mr. Blonien was not a partner) that was inconsistent with
the position taken by the partnership on the Schedule K-1 (that
Mr. Blonien was a partner).
The TEFRA provisions incorporate the duty of consistency,
requiring partners on their individual returns to follow the
return filed by the partnership. Section 6222(a) provides:
“A partner shall, on the partner’s return, treat a partnership
item in a manner which is consistent with the treatment of such
partnership item on the partnership return.” If a partner
believes that the partnership’s treatment of an item is
erroneous, the partner may elect out of the duty of consistency
by treating the item inconsistently with the partnership’s
treatment and filing “with the Secretary a statement identifying
the inconsistency.” Sec. 6222(b)(1)(B). Section 301.6222(b)-1T,
Temporary Proced. & Admin. Regs., 52 Fed. Reg. 6782 (Mar. 5,
1987), provides that “the statement identifying an inconsistency
described in section 6222(b)(1)(B) shall be filed by filing the
form prescribed for that purpose in accordance with the
instructions accompanying that form.” The instructions to Form
8082 at all relevant times required the filing of Form 8082 if
“you believe an item was not properly reported on the Schedule K-
1 * * * you received from the partnership”.
Petitioners were aware of the requirement to file Form 8082
in 1992; they filed Form 8082 with their 1992 return to take a - 24 -
position with respect to Mr. Blonien’s share of items from
Whitman & Ransom that was inconsistent with Whitman & Ransom’s
return.
If a partner takes a position on his return inconsistent
with the partnership’s position on its return and properly files
a Form 8082 calling attention to the inconsistency, the
Commissioner has the option of (1) converting all partnership
items arising from that partnership into nonpartnership items and
resolving them at the partner level by so notifying the partner
under section 6231(b)(1)(A), or (2) determining the items at the
partnership level while allowing the inconsistent treatment
pending the conclusion of the partnership-level proceedings.
Sec. 301.6222(b)-2T(a), Temporary Proced. & Admin. Regs., 52 Fed.
Reg. 6782 (Mar. 5, 1987).
A partner who receives a Schedule K-1 and fails to notify
the Commissioner of inconsistent treatment by filing a Form 8082
is bound by the partnership’s position on its return. The
Commissioner may make a computational adjustment (without
following the deficiency procedures) to make the partner’s return
consistent with the partnership’s return. Sec. 6222(c); sec.
301.6222(b)-2T(a), Temporary Proced. & Admin. Regs., supra.
On no return that is part of the record in this case did
petitioners notify respondent that Mr. Blonien was not a partner.
Petitioners led respondent to believe that Mr. Blonien was a - 25 -
partner in Finley Kumble, and that the appropriate way to collect
additional amounts that might be owed by the Finley Kumble
partners was to determine the partnership items in a partnership-
level proceeding. See sec. 6221 (“the tax treatment of any
partnership item * * * shall be determined at the partnership
level” (Emphasis added.)). Had petitioners properly notified
respondent at the time they filed their 1992 return of their
position that Mr. Blonien was not a partner in Finley Kumble,
respondent could have converted the issue to a partner-level item
under section 6231(b)(1)(A) or could have addressed the issue, on
notice to petitioners, in a partnership-level proceeding under
section 301.6222(b)-2T(a), Temporary Proced. & Admin. Regs.,
supra, all within the period of limitations. By failing to file
a Form 8082 after receiving a Schedule K-1 from Finley Kumble,
petitioners accepted the position stated on the Schedule K-1 Mr.
Blonien received (that Mr. Blonien was a partner in Finley
Kumble), deprived respondent of an opportunity to address the
issue before the expiration of the period of limitations, and
thereby waived the right to take an inconsistent position on
their return.
It was petitioners’ conduct in claiming on prior returns
that Mr. Blonien was a partner, and in failing to notify
respondent timely of their position that Mr. Blonien was not a
partner, that deprived Mr. Blonien of the opportunity to have the - 26 -
issue disposed of in a way that would have allowed him to
participate in the determination. Therefore, petitioners have no
standing to assert that they have been deprived of due process on
the grounds they did not have a prior opportunity to dispute Mr.
Blonien’s partnership status.
We Also Lack Jurisdiction To Consider Petitioners’ Argument That the Issuance of the FPAA Was Not Timely
In their petition to this Court, petitioners also challenged
the timeliness of the FPAA, arguing that the TMP’s extensions of
the period of limitations were invalid. After petitioners filed
their petition, we issued our decision in Overstreet v.
Commissioner, T.C. Memo. 2001-13, affd. in part and dismissed in
part 33 Fed. Appx. 349 (9th Cir. 2002), in which we held that a
Finley Kumble partner did not have standing in a partner-level
proceeding to challenge the timeliness of the FPAA. We held that
expiration of the period of limitations for issuance of the FPAA
is an affirmative defense that must be raised in a partnership-
level proceeding.
At trial, petitioners and respondent stipulated to be bound
by the final decision in the Overstreet case. Our decision in
Overstreet is now final, as a result of dismissal of the
taxpayer’s untimely appeal by the Court of Appeals for the Ninth
Circuit. See 33 Fed. Appx. 349 (9th Cir. 2002). On the basis of
the parties’ stipulation in the case at hand, petitioners cannot
challenge in this proceeding the validity and timeliness of the - 27 -
Finley Kumble FPAA issued on August 10, 1998, or the extensions
of the period of limitations granted by Mr. Manley as TMP of
Finley Kumble.
We Have Jurisdiction To Determine How Mr. Blonien’s Share of Finley Kumble’s Partnership Items Will Affect Petitioners’ Income Tax Liability
While we lack jurisdiction in this proceeding to consider
petitioners’ argument that Mr. Blonien was not a partner or to
review the allocation to Mr. Blonien of shares of partnership
items, we have jurisdiction to consider whether assessment of a
deficiency against petitioners is barred by the statute of
limitations, and whether respondent correctly determined
petitioners’ tax liability on the basis of the allocation made to
Mr. Blonien at the partnership level.
Under TEFRA, after the allocation to the partners of
partnership items is determined at the partnership level, the
partners’ individual tax liabilities must be determined. This is
done by way of “computational adjustments” and “affected items”,
two terms of art under TEFRA. According to section 6231(a)(5)
and (6):
The term “affected item” means any item to the extent such item is affected by a partnership item.
The term “computational adjustment” means the change in the tax liability of a partner which properly reflects the treatment under this subchapter of a partnership item. * * *
In GAF Corp. v. Commissioner, 114 T.C. at 523, we stated: - 28 -
If a computational adjustment results in a deficiency in a partner's tax, the partner is accorded the right to challenge the adjustment pursuant to the deficiency procedures provided for in subtitle F, chapter 63, subchapter B of the Internal Revenue Code only if and to the extent the change in the partner's tax liability cannot be made without making one or more partner-level determinations. See sec. 6230(a)(1); sec. 301.6231(a)(6)-1T, Temporary Proced. & Admin. Regs., 52 Fed. Reg. 6790 (Mar. 5, 1987).
Therefore, we have jurisdiction in this proceeding to determine
the effect of the Finley Kumble partnership-level allocations on
petitioners’ tax liability to the extent the change in
petitioners’ tax liability resulting from the partnership-level
allocations requires partner-level determinations.
Determining whether the assessment of the deficiency is
timely under the applicable statute of limitations requires a
partner-level determination of the timeliness of respondent’s
assessment with respect to each partner in the partnership.
Similarly, determining whether respondent gave petitioners credit
for the income recognized on their return in computing their
deficiency and determining the effect of the additional Finley
Kumble income on the phaseout of itemized deductions under
section 68(a)10 may require partner-level determinations. We
10 Because the phaseout of itemized deductions under sec. 68(a) is computational and does not require any special partner- level factual determinations, it appears that respondent could have assessed the affected item adjustment as computational without following the deficiency procedures of ch. 63, subch. B of the Internal Revenue Code. See sec. 301.6231(a)(6)-1T(a), Temporary Proced. & Admin. Regs., 52 Fed. Reg. 6790 (Mar. 5, (continued...) - 29 -
have jurisdiction in this proceeding to review these partner-
level determinations. Before considering the merits of
petitioners’ claims, we consider petitioners’ evidentiary
objections.
Petitioners’ Evidentiary Objections
Petitioners object to the admissibility of Exhibit 3-J
(Finley Kumble’s partnership return for 1992) and Exhibit 4-J
(Finley Kumble Schedule K-1 for Mr. Blonien for 1992) on the
ground that respondent failed to authenticate the documents under
rule 901 of the Federal Rules of Evidence and on the ground that
the documents are inadmissible hearsay under rule 802 of the
Federal Rules of Evidence.
Respondent submitted a certification that the partnership
return is an authentic copy of the document filed with respondent
by Finley Kumble. The copy of the document is incomplete because
it does not include the Schedules K-1 for all 280 partners.
Petitioners argue that the entire document is inadmissible
because the copy is incomplete.
10 (...continued) 1987). On the other hand, in certain circumstances, the computational adjustment for passed-through discharge of indebtedness income could require a partner-level solvency determination. See sec. 108(a)(1)(B), (d)(6). In the case at hand, respondent followed the deficiency procedures of ch. 63, subch. B, of the Internal Revenue Code in connection with both the affected item and the computational adjustment. - 30 -
Parties do not need to introduce complete versions of
documents. Under rule 106 of the Federal Rules of Evidence, the
adverse party “may require the introduction at that time of any
other part * * * which ought in fairness to be considered
contemporaneously with it.” Petitioners did not require the
introduction of the missing 279 Schedules K-1 or show that the
missing Schedules K-1 ought in fairness be considered with the
remainder of the partnership return.
Petitioners argue that the Schedule K-1 for Mr. Blonien
should not be admitted because respondent did not include “the
partner letter originally attached to the Schedule K-1”.
Respondent has confirmed that the Schedule K-1 filed with the
return did not include a partner letter. Petitioners have failed
to establish that the partner letter ought in fairness to be
considered with the Schedule K-1; petitioners’ authentication
objections are denied.
Petitioners also argue that these exhibits should not be
admitted because they are hearsay--offered to prove that Mr.
Blonien was a partner in Finley Kumble. Respondent responds that
these documents are not offered to show that Mr. Blonien was a
partner in Finley Kumble. The documents are offered to show that
Finley Kumble purported to be a partnership that would be subject
to the TEFRA proceedings and to show Finley Kumble’s state of
mind--that Finley Kumble treated Mr. Blonien as a partner. The - 31 -
documents are not offered to establish and do not establish that
Mr. Blonien was a partner in Finley Kumble. The documents are
admitted for the purposes offered.
Exhibits 5-J through 9-J consist of documents relevant to
establishing the issuance and timeliness of the FPAA issued to
Finley Kumble. At trial, the parties stipulated to be bound by
the final decision in Overstreet v. Commissioner, T.C. Memo.
2001-13, in which this Court determined that the expiration of
the period of limitations for issuance of the FPAA issued to
Finley Kumble is an affirmative defense that must be raised in a
partnership-level proceeding. Because the taxpayers in
Overstreet did not timely file an appeal from the Tax Court’s
decision, the Tax Court’s decision is now final and binding on
the parties in the case at hand under the terms of their
stipulation. The parties agree that Exhibits 5-J through 9-J are
relevant only if petitioners can challenge the timeliness of the
FPAA in this proceeding. On the basis of the parties’
stipulation to be bound by the final decision in Overstreet, we
hold that petitioners cannot challenge the timeliness of the FPAA
in this proceeding. Therefore, Exhibits 5-J through 9-J are not
relevant.
Petitioners argued in their opening brief that Exhibit 10-J,
a computational adjustment report, is irrelevant. Respondent
pointed out that the exhibit may be necessary to compute the Rule - 32 -
155 calculation under certain circumstances. Petitioners in
their reply brief did not dispute respondent’s contention.
Therefore, Exhibit 10-J has been admitted into evidence for that
purpose.
Exhibits 16-J and 19-J are documents reflecting the
settlement agreement between Mr. Blonien and the trustee of
Finley Kumble’s bankruptcy estate regarding Mr. Blonien’s
agreement to make payments as part of Finley Kumble’s
reorganization plan. The settlement document refers to Mr.
Blonien as a “partner”.
Petitioners argue that the documents are not admissible
under rule 408 of the Federal Rules of Evidence because the
statements were made in settlement of a dispute. We do not agree
with petitioners. Rule 408 only bars the admissibility of
evidence to “prove liability for * * * the claim or its amount.”
Mr. Blonien’s settlement is not offered in this proceeding to
prove liability for or the amount of the bankruptcy trustee’s
claim against Mr. Blonien. See Bituminous Constr., Inc. v.
Rucker Enters., Inc., 816 F.2d 965 (4th Cir. 1987) (letters
containing settlement offers were properly admitted to show the
defendant’s understanding of its obligations under a joint-check
agreement). The settlement agreement is being offered for the
purpose of impeaching Mr. Blonien’s credibility and establishing - 33 -
that he agreed to be treated as a partner of Finley Kumble, at
least for certain purposes.
However, because we lack jurisdiction to consider
petitioners’ contention that Mr. Blonien was not a partner in
Finley Kumble, the document is not relevant to the resolution of
any issue in dispute in this case.
Finally, petitioners argue that Exhibit 17-J, a letter from
petitioners’ accountant to respondent, should not be admitted.
In the letter, petitioners’ accountant requested an abatement of
late-filing penalties. In support of the request, petitioners’
accountant stated that abatement is appropriate because Mr.
Blonien was a partner in Finley Kumble, and Finley Kumble had not
provided information to petitioners in time to enable them to
timely file their Federal income tax returns. Petitioners argue
that these statements were not excepted from hearsay by rule
801(d)(2)(C) of the Federal Rules of Evidence (statements by
authorized agents of a party) because respondent failed to show
that the accountant was authorized by petitioners to make the
statements.
We need not consider these issues because the letter is
irrelevant to any issue in dispute in this case. We have no
jurisdiction to consider petitioners’ argument that Mr. Blonien
was not a partner in Finley Kumble. Therefore the letter will
not be admitted in evidence. - 34 -
Period of Limitations on Assessment of Deficiency
Petitioners contend that the 3-year period of limitations
set forth in section 6501 bars respondent from assessing the
deficiency in the case at hand. Section 6501(a) provides
“Except as otherwise provided in this section, the amount of any
tax imposed by this title shall be assessed within 3 years after
the return was filed (whether or not such return was filed on or
after the date prescribed).” Except in certain specified
circumstances not relevant to the case at hand, the Commissioner
must, before assessing a deficiency, mail the taxpayer a notice
of deficiency in accordance with section 6212. Sec. 6213(a).
Section 6503(a)(1) provides:
The running of the period of limitations provided in section 6501 * * * on the making of assessments * * * in respect of any deficiency * * * shall * * * be suspended for the period during which the Secretary is prohibited from making the assessment * * * (and in any event, if a proceeding in respect of the deficiency is placed on the docket of the Tax Court, until the decision of the Tax Court becomes final), and for 60 days thereafter.
The Secretary is prohibited from assessing the deficiency during
the 90-day period following mailing of a notice of deficiency
prepared under section 6212, and, if a petition is filed with the
Tax Court, until the decision of the Tax Court has become final.
Sec. 6213(a). Therefore, unless another provision extends the
period for assessment contained in section 6501(a), the
Commissioner must mail the notice of deficiency to the taxpayer - 35 -
within 3 years following the filing of the taxpayer’s income tax
return in order to be able to assess the deficiency timely.
In the case at hand, respondent did not mail the notice of
deficiency within 3 years following the filing of petitioners’
1992 Federal income tax return. Petitioners filed their 1992
Federal income tax return on October 15, 1993, and the notice of
deficiency was not mailed until December 17, 1999, more than 6
years later. Therefore, unless the period for assessment is
otherwise extended or subject to a different period of
limitations, respondent would be barred by section 6501(a) from
assessing the deficiency.
Respondent argues that the period for assessment of the
deficiency is subject to the alternative period of limitations
contained in section 6229, which is part of the unified audit and
litigation procedures for partnerships enacted by TEFRA.
In Rhone-Poulenc Surfactants & Specialties, L.P. v.
Commissioner, 114 T.C. 533, 539-540 (2000), we explained the
history and purpose of the uniform partnership procedures enacted
by TEFRA:
For income tax purposes, partnerships are not taxable entities. * * * Any income tax attributable to partnership items is assessed at the partner level. Thus, any statute of limitations provisions that limit the time period within which assessment can be made are restrictions on the assessment of a partner’s tax.
Before TEFRA, adjustments with respect to partnership items were made to each partner’s income tax return at the time (and if) that return was - 36 -
examined. * * * The tax-writing committees explained the TEFRA partnership provisions as follows: “[T]he tax treatment of items of partnership income, loss, deductions, and credits will be determined at the partnership level in a unified partnership proceeding rather than in separate proceedings with the partners.”
In Greenberg Bros. Pship. #4 v. Commissioner, 111 T.C. 198, 201
(1998), we explained that “The principal purpose behind TEFRA is
to provide consistency and reduce duplication in the treatment of
‘partnership items’ by requiring that they be determined in a
unified proceeding at the partnership level.”
In order to achieve the goal of having partnership items
(which ultimately affect each partner’s tax liability) determined
in a single proceeding at the partnership level, Congress enacted
section 6229, which extends the period of limitations applicable
to assessment of deficiencies against the individual partners
relating to the adjustment of partnership items:
SEC. 6229(a). General Rule.--Except as otherwise provided in this section, the period for assessing any tax * * * which is attributable to any partnership item (or affected item) for a partnership taxable year shall not expire before the date which is 3 years after the later of–-
(1) the date on which the partnership return for such taxable year was filed, or
(2) the last day for filing such return for such year (determined without regard to extensions.
The limitations period can be extended for a particular partner
by agreement with that partner, or for all partners by the tax
matters partner. Sec. 6229(b)(1). The period is suspended - 37 -
following the mailing to the tax matters partner of an FPAA
during the period under section 6226 for partners to challenge
the adjustment (150 days), and for 1 year thereafter. Sec.
6229(d). Thus, section 6229(d) extends “the time for respondent
to issue the notice of deficiency until 1 year and 150 days after
the issuance of the FPAA.” Overstreet v. Commissioner, T.C.
Memo. 2001-13.
The “affected items” notice of deficiency was mailed to
petitioners on December 17, 1999--within 1 year and 150 days
after the issuance of the FPAA on August 10, 1998. Therefore, if
section 6229(d) applies to the items set forth in the notice of
deficiency mailed to petitioners, an assessment thereon would not
be barred by the statute of limitations.
Section 6229(d) applies to the case at hand because Mr.
Blonien was determined to be a partner in Finley Kumble at the
partnership level. We have no jurisdiction in this partner-level
proceeding to consider petitioners’ argument that the
partnership-level determination was wrong. We are bound by the
determination made at the partnership level that Mr. Blonien was
a partner in Finley Kumble for Federal income tax purposes.
Therefore, respondent is not barred from assessing petitioners a
deficiency arising from Mr. Blonien’s share of Finley Kumble’s
items. - 38 -
Rule 155 Computation
Respondent stated on brief: “If respondent prevails, this
case may require a Rule 155 computation.” We agree that a Rule
155 computation is appropriate. Respondent did not allow
petitioners credit for the $2,000 of Finley Kumble COD income
that they reported on their 1992 return. Respondent also
indicated on brief that Exhibit 10-J may have a bearing on the
appropriate adjustments if a Rule 155 computation is required;
other items and amounts determined at the partnership level to be
allocated to Mr. Blonien are not clearly set forth in the FPAA
and the deficiency notice. The parties should address and
resolve these issues in the Rule 155 computation.
To reflect our holdings herein,
Decision will be entered
under Rule 155.